While attending RSPA I learned that IBM was in talks to acquire Revel. It was a strange coincidence that the story broke at the exact same time Bill Draper, Bill Bradley and I held our RetailNow session where we openly discussed the impossibility of continued financing for the large, venture-backed cloud POS companies.
So what’s happening?
First, there’s a drastic change in “venture” capital. As I’ve opined before, “venture” has become growth equity (i.e. low-risk money) that’s simply fooling financially-naive founders otherwise. Where “venture” previously invested in small teams with big promise, they now look at mature companies with high profitability and high growth.
Cloud POS companies today are either not growing fast enough or are not profitable enough to continue raising private money. But we should step back to better understand their conundrum.
“Venture” capital requires large exits to make returns for their investors. The rule of thumb is that you need a clear path to reach $100 million in annual revenue in three years from the first day you take venture money or it’s simply not money worth taking. The $100M ARR might sound arbitrary, but it’s the revenue needed to IPO a company in today’s climate. Founders who think they can achieve this scale are frequently lured by increasingly higher valuations proposed by “venture” investors with little attention paid to the downside should expectations not be met.
The “venture” investors are competing against conventional growth equity funds so they’re driving up valuations to get founders excited. But reaching $100M in ARR in three years is basically impossible unless you’re a once-in-a-decade company like Google or Facebook. Therefore, the majority of founders are pretty much signing up to eat crow.
Now as it relates to cloud POS, investors watch for signs that their investments are not going to reach that magical $100M ARR mark. When those signals become clear, the “venture” investors start looking for an exit immediately. This averages out to a holding period of five years per venture investment: those that can reach IPO might be held for 6 or 7 years where the flailing startups are sold quickly.
What we see with the older – and larger – cloud POS companies is a history of big financings but an apparent lack of time to reach expectations. First money at Revel came in May of 2011 and has now totaled $127M. If we do some math we’ll see that Revel is past that five year average holding period. Is Revel earning close to $100M in ARR?
The most likely answer is no, and neither can it raise more private money. The odd timing of its last round of financing in August of 2015 tells us something strange is going on.
Revel isn’t alone in this either. Shopkeep, which has raised $72M since 2012, will find itself in the same boat over the next 18 months. My back-envelope math puts Revel at $40M ARR and Shopkeep at $30M. Caveat: processing revenues could impact these numbers by 50%.
Why IBM would want to buy Revel is a more confusing discussion. IBM is trying to get more into software, services and data, much like GE and every other company that realizes hardware is hosed. No idea why IBM sold its POS assets when it could have easily built data replication to turn that hardware business into a software, services and data opportunity on top of a much larger merchant footprint than Revel represents. What I do know is that 70% of M&A fail to achieve expectations, and should IBM buy Revel it will likely be mothballed to irrelevance. Watch what’s happening with Oracle and Micros and ask their customers and dealer channels if that’s been a good thing.
A lot of POS revenue woes could be fixed with cross sell and upsell, but “venture” investors – who have no idea how brick and mortar work or they wouldn’t put money here to begin with – are making their companies focus on the wrong things. I’m writing a few posts that detail the immense value in cross selling but don’t have time to squeeze it in here thoughtfully.
What we expect is a liquidity event for Revel in the next 12 months, with Shopkeep sometime in the following 12. It’s doubtful to be an IPO and will more likely be a sale, merger, or implosion of epic proportions.
How these go down will have massive impacts on the industry at-large.
Our calculus says that investors have had their fill of POS for the time being. The lack of growth and apparent struggles of any cloud POS company to reach IPO in a reasonable timeframe has the smarter investors squeamish (though one could argue the really smart investors never put money into brick and mortar to begin with). Any publicized outcome short of IPO will keep money away for a long time.
What this could mean for the POS industry is a (brief) return to increased POS prices. The legacy POS providers have long-argued that cloud POS prices are being suppressed by investors in a race to acquire market share at the expense of margins. No doubt there is some truth to this.
But it’s also wildly foolish. Technology is changing with or without external investment. Investment speeds up the process, sure, but you cannot deny the internet has had great impact. When was the last time you bought a computer at a local store, or used a paper map to route your way?
There is zero reason why brick and mortar should not benefit from the internet
The connectivity the internet brings will drop POS prices for a myriad of reasons: cheaper software, cheaper hardware, better service and support and new business models that create revenue elsewhere. Each one of these could merit its own article. That legacy POS providers refuse to give their customers this value will be harshly punished by the market in time.
When, or if, this comes to pass is a waiting game. Revel and Shopkeep will make it all clear in the next 24 months. Should they fail, Toast and Lightspeed will be the last bastions of first-gen cloud POS. With or without them, however, cloud will still arrive. Change is inevitable; you cannot fight the market.